The Merlin was an evolution of earlier modification programs performed by Swearingen Aircraft. Ed Swearingen started the developments that led to the Merlin through gradual modifications to the BeechcraftTwin Bonanza and Queen Air business aircraft which he dubbed Excalibur. Then a hybrid aircraft was developed, with a new fuselage and vertical fin, mated to salvaged and modified (wet) Queen Air wings and horizontal tails, and Twin Bonanza landing gear. This was the SA26 Merlin, more-or-less a pressurized Excalibur but fitted with a different model engine, the Lycoming TIGO-540 6-cylinder geared piston engine. The TIGO 540 was used despite the fact that one of the reasons the IO-720 was used in the Excalibur was that the Queen Air series' IGSO-480 and IGSO-540 engines from the same manufacturer were so troublesome. The decision was soon made to offer increased engine power, which was achieved through installing two Pratt & Whitney Canada PT6A-20 turboprop engines, resulting in the SA26-T Merlin IIA.

The prototype IIA took to the air for the first time on 13 April 1965, about fifteen months after the competing Beech Model 65-90 King Air (which was also derived from the Model 65 Queen Air). 36 Merlin IIA models were built before a follow-on model with Garrett AiResearch TPE-331-1 engines called the SA26-AT Merlin IIB entered production after AiResearch was appointed as distributor for the type. The TPE-331 became the definitive engine of all subsequent production Merlins and the longer-fuselage Metros that were to follow. The Australian Department of Civil Aviation (now the Civil Aviation Safety Authority) took delivery of four Merlin IIBs in 1969 and operated them for almost fifteen years. The Merlin IIAs and IIBs were visually still obviously derivatives of the Queen Air, featuring as they did Queen Air tailplanes and wings with the same flat-top engine nacelles as the Excalibur Queen Airs; the airstair in the same place and of the same general design as the Queen Air; and the nose being especially similar, of the same general shape with access panels the same size, shape and location as those of the Queen Air.

These visual similarities ended with the next model, the SA226-T Merlin III, which was placed in production in February 1972 after 87 Merlin IIBs were built. This had new wings and engine nacelles with inverted inlet Garrett engines (this again becoming a defining feature of all subsequent production models), new landing gear with two wheels on each leg, a redesigned horizontal tail mounted on the vertical fin instead of on the fuselage as in earlier models and a redesigned longer nose with room for a baggage compartment as well as the avionics found in the noses of Merlin II series aircraft. All of these design changes came from the Metro design, which was undergoing development in the late 1960s.

The SA226-TC Metro was more-or-less a new design, conceptually a stretch of the Merlin II (which it superficially resembled) sized to seat 22 passengers. Prototype construction of the Metro began in 1968 and first flight was on 26 August 1969. The standard engines offered were two TPE331-3UW turboprops driving three-bladed propellers. A corporate version called the SA226-AT Merlin IV was also marketed and initially sales of this version were roughly double that of the Metro. These sales were not immediately forthcoming however, as the company was financially stretched by the development of the Metro prototype and lacked the funds to gear up for production. This situation was rectified in late 1971 when Ed Swearingen agreed to sell 90% of the company to Fairchild; the company was then renamed Swearingen Aviation Corporation.

By the end of 1972 six Merlin IVs had been built and production gradually built up alongside the concurrently produced short-fuselage Merlin III. In 1974, the original Merlin IV and Metro models were replaced by the SA226-AT Merlin IVA and the SA226-TC Metro II after about 30 Merlin IVs and about 20 Metros had been built. Among the changes made were larger, ovalised rectangular windows replacing the circular porthole-style windows of the early aircraft, and optional provision for a small Rocket-Assisted Take Off (RATO) rocket in the tail cone, this being offered to improve takeoff performance out of "hot & high" airfields. The same year the Merlin III was replaced by the SA226-T Merlin IIIA, with an extra window on the right side of the cabin and a small window aft of the airstair on each side of the fuselage. Customers for the Merlin IIIA included the Argentinian Air Force, the Argentine Army and the Belgian Air Force.